Emerging markets–China, Brazil, Indonesia, Russia, South Africa and Turkey–seem to be the next place to go in the realm of venture capital. According to The Economist, in 2011, $3.4 billion of venture-capital deals were done in emerging markets, more than double the amount in 2008.
Two of the VC firms we will be visiting–KPCB and Sequoia–both hold large, diversified portfolios of Chinese companies ranging from biotech to cosmetic retails. They both invested in Alibaba and JD.com.
Most people probably know Alibaba. It is the biggest e-commerce giant in China whose service includes online retail, personal finance, mobile payment and many more. In the fiscal year 2017, its revenue reached an overall increase of 56% to $22,994 billion. With 560 million Internet users spending 20 hours online per week, China is by far the largest Internet market in the world — twice the size of the U.S. market. Alibaba’s dominance is astonishing. Its mobile payment/finance app is truly a one-stop destination for a Chinese: one can easily manage mortgage loans and utility bills in one app.
JD.com is Alibaba’s online retail business rivalry. While Alibaba’s online retail is mostly consumer-to-consumer, JD.com is primarily business-to-consumer. According to Sequoia, JD.com is China’s largest e-tailer and the third largest internet company in the world by revenue. The company’s public listing, in May of 2014, was the largest IPO of the year on NASDAQ.
Separately, they invested in many other unicorn-like companies in China, such as Baidu (KPCB), the Chinese Google and Didi (Sequoia), the Chinese uber.
Clearly, these VC firms are doing well in China. But my previous analogy exactly hinted at the less known realities of start-ups in emerging markets and the subsequent challenges. Baidu and Didi both were inspired by American companies who turned out to be more successful mostly because of their familiarity with Chinese regulations and resourcefulness in navigating political climate.
In the assigned video for this class, Doug Leone explained that Sequoia pulled out of Brazil because there were not enough computer engineers to truly create an environment of technology entrepreneurship. At some other occasions, Doug Leone expressed:
“In emerging markets like China, around 50% of start-ups backed by foreign venture capitalists in the internet and mobile sectors are copycats, and in markets like Brazil, it is closer to 70%.”
The biggest advantage of these copy-cats is the ability to tailor the businesses to local habits. For example, Flipkart is an online-commerce site in India. It has received funding from a New York hedge fund and a Californian venture-capital firm. Credit cards are less common in India, Flipkart’s value proposition is the option of payment on delivery.
In Turkey, Trendyol is a flash sale site backed by KPCB. It is modeled after Vente-privee.com, a French e-commerce company that pioneered the model of online flash sales in 2001, and Gilt Groupe, an American company popularised the idea of time-limited online sales of designer clothing. It is different in that it sells its own clothing line with seasonal designs “crowdsourced” from users in Turkey.
The problem is that these copycats can easily lose share when the original company eventually enters the local market. As The Economist notes, Sonico was once the Facebook of Latin America. Its active user base plummeted when Facebook arrived. Further, even if they can compete well with the original company in their country, they are unlikely to establish international presence because the concepts are not new.
The answer to the question in the title is not simple. I do not want to take away the excitement of silicon valley expanding its investment portfolio into emerging markets, but I want to put things in perspective because I used to be overly-excited about the always-positive venture capital narrative in emerging markets and was totally blind about these challenges. I have couple questions for Sequoia and KPCB:
- For Sequoia: Doug Leone emphasized that Sequoia China is not a franchise but Sequoia in China when the early operation in China was quite decentralized. How was Sequoia able to make sure Sequoia China stay consistent with the existing culture and values?
- For KPCB: I noticed on your website that KPCB China operates independently, and I am guessing due to Chinese regulation. How is KPCB China in relation to KPCB in terms of decision making and how do you orient KPCB China with the same culture.